The disruption from COVID-19 may serve as a catalyst for asset managers to reevaluate their operating models.
Asset managers continue to face pressure on their bottom line, driven by falling fees and the shift to low-cost products. At the same time, the industry has seen its operating costs continue to rise. In 2018, asset managers’ costs were 56% higher than they were a decade earlier, according to Boston Consulting Group. As they look for ways to reduce costs and increase efficiency, firms’ operations are under scrutiny. According to Accenture, 53% of asset managers identified operating model changes as their top strategy for improving overall efficiency.
The disruption from COVID-19 may serve as a catalyst for firms to reevaluate their operations and get them in shape for the 21st century. In order to do so, firms need to take action to make their operations faster, leaner, and stronger to better position them to succeed in the challenging environment.
Faster with Technology
The rise of Artificial Intelligence (AI) solutions in the last decade has been driven by an increase of low-cost computing power, alongside an explosion of available data. While the use of AI is commonplace in portfolio management, operations departments have begun to adopt AI to help increase efficiency and accuracy of processes. In fact, 70% of operations leaders expect AI to deliver the next wave of cost reductions to the industry, according to Accenture. One of the biggest challenges when adopting AI is getting the appropriate level of sophistication to support a business case. “The technology is moving quickly and the start-up costs are not insignificant,” says Christopher Low, Managing Director, Head of Wealth & Asset Management Firms, UK & Ireland at Accenture. “Many firms are looking to leverage strategic partners to accelerate their learning with these technologies and use them to add value quickly.”
For operations, the most common use of AI is Robotic Process Automation (RPA), which can help managers streamline and automate repetitive or rules-based tasks like anti-money laundering checks, know your customer reviews, and post-trade reconciliations. RPA is attractive to asset managers because it is configured to work with legacy systems so there’s no need to invest in new infrastructure. Without the need to update core systems, the implementation time is much quicker.
By removing manual touch points, deploying RPA can help make asset managers’ operations more efficient and reduce the potential for errors. A successful deployment of RPA can be self-reinforcing for organizations. As Low notes, “Successful use of RPA often leads to continuous exploration to find new ways to automate high volume and repetitive tasks. This can improve productivity as well as free up operations staff to focus on more value-added functions.”
Successful use of RPA often leads to continuous exploration to find new ways to automate high volume and repetitive tasks. This can improve productivity as well as free up operations staff to focus on more value-added functions.
Leaner with Outsourcing
Outsourcing is a common strategy for firms looking to make operations leaner; nearly 60% of asset managers are in the process or considering outsourcing operations activity, according to Deloitte. However, the approach firms are taking is evolving. While previous waves of outsourcing focused on resource intensive back-office functions, the next wave will focus on the middle office, which includes processes that sit between the trading and the post-trade activities. Given that these processes are more connected to front office activities, like portfolio management, asset managers need to consider what processes can be done by a third party without disrupting the investment process. This often requires balancing the need for cost reduction against the need to retain the right level of in-house support. “More asset managers are taking a modular approach, as opposed to the wholesale outsourcings of the past,” says Jon Gezotis, Director of Product Management for Middle Office and Fund Services at Citi. “Firms should consider outsourcing in the context of a larger operations overhaul and set a strategy that leverages both outsourcing and technology to create a flexible operating model that’s tailored to their needs.”
Firms should consider outsourcing in the context of a larger operations overhaul and set a strategy that leverages both outsourcing and technology to create a flexible operating model that’s tailored to their needs.
In the past few years asset managers have focused on outsourcing a couple of areas of the middle office. The first is processing complex securities transactions, in particular over-the-counter (OTC) derivatives, which often involve manual processes or workarounds. Given the rapidly evolving nature of the OTC derivatives markets, managers may choose to outsource their processing, rather than constantly upgrading their systems. Another area that is frequently outsourced is the Investment Book of Records (IBOR) process. IBOR provides portfolio managers and traders real-time information on their securities and cash positions. Historically firms either developed a proprietary technology solution to provide IBOR, or purchased a third-party solution. Now many are choosing to outsource IBOR because they can shift the ongoing technology maintenance cost to the service provider, which can free up their tech budgets to focus on core asset management activities.
Beyond potential headcount reduction, middle office outsourcing can give asset managers scalable operations that would be expensive to build on their own. “We’re now relying more on service providers to do the heavy lifting since many have the technology, scale, and geographical footprint. This allows our operations staff to allocate more time on communicating effectively with the front office to ensure the information they’re trading on is correct,” says Bob Pieroni, Director of Investment Operations at Eaton Vance.
We’re now relying more on service providers to do the heavy lifting since many have the technology, scale, and geographical footprint. This allows our operations staff to allocate more time on communicating effectively with the front office to ensure the information they’re trading on is correct.
Stronger with People
While making operations faster and leaner can lead to a reduction in headcount, staff remain crucial to a strong operations function. Firms that engage in middle office outsourcing need to maintain oversight of these arrangements to help mitigate any issues that may arise and ensure that the provider is meeting its performance targets. This requires a governance program and possibly creating new roles or expanding existing ones to cover the new activities that requires oversight. “Asset managers’ efforts to develop intelligent processes and risk monitoring capabilities have led to increased demand for staff with workflow optimization experience,” says Ed Kapur, Senior Manager, Technology Strategy and FinTech Alliance Leader at Deloitte. “This includes experience with low code development platforms that can aid in the creation of tools like workflow dashboards and interfaces.” Similarly, the deployment of RPA requires staff to maintain and monitor their performance. However, rather than focusing on the processing, staff needs to have the ability to troubleshoot and adjust the RPA to help ensure they keep performing their function.
Asset managers’ efforts to develop intelligent processes and risk monitoring capabilities have led to increased demand for staff with workflow optimization experience. This includes experience with low code development platforms that can aid in the creation of tools like workflow dashboards and interfaces.
By reducing the amount processing work, firms can reorient their operations team’s efforts from transactional work to more strategic roles. “Even before COVID-19, the middle office was transforming from a processing function to playing a more analytical role,” says Pieroni. “The pandemic has only accentuated the need for problem solvers and exception-based thinkers who can be proactive in a remote environment.” This means hiring staff with more business and technology skills could help drive innovation to tackle more complex issues. Embedding these skills into operations will help firms innovate quicker and better support the business as it grows. Ultimately, the boundaries between front and back office are coming down, which hopefully creates an opportunity for operations professionals to move into front office roles. “When those opportunities present themselves, persons with understanding of operations they can often resolve issues on their own, which can help create a more efficient operating model,” notes Pieroni.
The Needed Spark
Often it takes the right spark to ignite organizations into action. By accentuating some well-known industry issues, COVID-19 may be the push many firms need to reevaluate their operating models. Asset management’s revenue challenge seems unlikely to abate and firms will continue to face pressure to reduce costs. Nonetheless, the industry is expected to continue to grow and with the right approach, firms can transform their operations to be in shape for the next decade.